Federal Reserve Risks Ruining Reserve Currency

The Fed ponders its biggest decision yet. Will it sacrifice the dollar?

Image: Mark Wilson/Getty

Joel Hilliker
The Trumpet

he Federal Reserve is expected to announce today whether or not to unleash a second round of quantitative easing. It may be one of the most important decisions in its history. Will the Fed sacrifice the dollar, and risk losing reserve currency status in an attempt to stimulate the economy and “painlessly” pay its debts?

The Telegraph’s Ambrose Evans-Pritchard is warning that the Fed’s quantitative easing plan “risks” a “currency war” that may accelerate “the demise of the dollar-based currency system, perhaps leading to an unstable tripod with the euro and yuan, or a hybrid gold standard.”

The problem facing the world is that the global economy is trapped in stalling speed. Most of the regular tools used by central banks have been exhausted. Interest rates are already near zero, and many governments have mostly spent what they can—and yet the global economy is sputtering.

All that is left for national economies is to try to gain export market share at the expense of their neighbors. To do this, nations are attempting to devalue their currencies to make their exports less expensive and imports more expensive. The risk, as Evans-Pritchard points out, is trade war.

Relations between China and America are especially strained. America wants to devalue the dollar and thus reverse its trade imbalance with China. China is resisting and is maintaining its dollar peg, which ensures that the yuan’s exchange rate remains fixed to the dollar. And the war is spreading. The Telegraph reports (emphasis ours throughout):

China’s Commerce Ministry fired an irate broadside against Washington on Monday. “The continued and drastic U.S. dollar depreciation recently has led countries including Japan, South Korea and Thailand to intervene in the currency market, intensifying a ‘currency war.’ In the mid-term, the U.S. dollar will continue to weaken and gaming between major currencies will escalate,” it said. …

Taiwan intervened on Monday to cap the rise of its currency, while Korea’s central bank chief said his country is eyeing capital controls as part of its “toolkit” to stem the flood of Fed-created money leaking out of the U.S. and sloshing into Asia. …

“It is becoming harder to mop up the liquidity flowing into these countries,” said Neil Mellor of the Bank of New York Mellon. “We fully expect more central banks to impose capital controls over the next couple of months. That is the world we live in,” he said. Globalisation is unravelling before our eyes.

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